The Canadian dollar has edged higher today. In the European session, USD/CAD is trading at 1.3173, up 0.17%.
BoC expected to remain aggressive
The Bank of Canada meets later today and policy makers are expected to keep their foot on the pedal and deliver a sizeable hike of 0.75%. This follows the surprise super-size increase of 1.00% in July, which brought the benchmark rate to 2.50%. The BoC considers its neutral rate around 2.50%, which means that rates are headed to restriction territory in a bid to curb red-hot inflation. There was some good news as July CPI dropped to 7.6%, down from 8.1% in June, but this has not changed the BoC’s policy. In July, Governor Macklem responded to the drop in CPI by saying the Bank was committed to acting forcefully against inflation in order to avoid a sharper economic downturn.
There had been some expectations that the BoC might implement another 1.00% increase at today’s meeting, but those expectations were dampened by last week’s disappointing GDP release for Q2. The economy grew by 3.3%, well short of the consensus of 4.4%, which means that the likely outcome of today’s meeting is a 0.75% hike.
At the July meeting, Macklem said that the BoC was committed to front-loading rate increases now in order to avoid even higher rates down the road. Assuming Macklem’s stance hasn’t changed, this means that the BoC will shift into low gear in October, with a small rate hike of 0.25% or possibly no increase at all. If the next inflation report shows another drop, the BoC will be able to breathe easier and ease up on its rate-tightening cycle.
- USD/CAD faces resistance at 1.3232, followed by 1.3338
- There is support at 1.3102 and 1.2996
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